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2010 07

UNE law lecturer Bryan Pape is an independent Senate candidate for New South Wales in this year’s federal election. He is perhaps best known for his High Court challenge to the constitutional validity of some of the Rudd government’s stimulus spending in Pape v The Commissioner of Taxation. The case was described by George Williams, another law academic and would-be ALP candidate as ‘a major victory for the states in the reasoning, it’s one of those very rare High Court decisions you get that’s going to change the way government operates.’

An opportunity to vote for a federalist and champion of states’ rights in the Senate.

Jonathan Weil asks why there is no investigation into Freddie and Fannie:

Still absent from the government’s agenda is any serious effort to hold anyone accountable for their ruin or investigate why they collapsed.

Back in December 2003, after Freddie disclosed what in retrospect was a relatively mild accounting scandal, its regulator published an exhaustive 185-page report cataloguing the company’s financial-reporting abuses. In May 2006, the same regulator disclosed similar findings about Fannie’s books in a report covering 348 pages.

Strangely, there’s no similar examination under way today by the Federal Housing Finance Agency into the reasons why Fannie and Freddie imploded in 2008, or whether anyone at the companies did anything improper. That’s probably because the agency and its predecessor, the Office of Federal Housing Enterprise Oversight, bear responsibility for letting the companies resume their natural tendency to run amok.

So here we go again. This month Congress passed the 2,323- page Dodd-Frank Act without any clear understanding of why the financial crisis happened—and without doing a thing to address Fannie and Freddie, which were central players. Now the Obama administration says it will deliver a reform proposal to Congress by January on the nation’s housing-finance system, including Fannie and Freddie. Yet the government still hasn’t undertaken any comprehensive inquiry into why these companies blew up and who was at fault.

I can only assume Weil’s column is rhetorical, because it is shriekingly obvious why there will never be an inquiry into the failure of Freddie and Fannie. The two GSEs did exactly what Congress mandated them to do, while Congress also stymied the attempt to reform them in 2004-05. Politicians are not interested in establishing an inquiry that can only lead to one conclusion: they were the authors of the global financial crisis of 2008.

BUILDERS and architects tendering for work under Julia Gillard’s school stimulus program were told to include a “cost escalation” of up to 10 per cent to cover the expected inflationary impact of the scheme.

The hidden cost of the Building the Education Revolution, revealed in documents submitted to a Victorian parliamentary inquiry, suggests that as much as $250 million of taxpayers’ money could have been spent to cover a surge in building material and labour costs created by the state’s $2.5 billion share of the stimulus program.

Contract details provided by an architecture firm reveal it was required by the Victorian Education Department to provide a 7 per cent “contingency fee” and a 10 per cent “cost escalation” in the tenders it submitted for work on four primary schools in Melbourne’s east.

Government sources confirmed last night the department specifically included escalation costs in BER projects “because the stimulus was going to be a significant injection into the market/economy and prices could be expected to increase with greater levels of work being undertaken”.

With both major parties offering to retard economic growth by conditioning immigration on existing policy failures in housing, transport and infrastructure, Imre Salusinszky offers politicians some handy talking points:

From one perspective, it’s a neat trick: you pander to inner-city prejudice by abandoning road construction, then use what you perceive to be outer-suburban bigotry to paper it over.

But in order to prevent further embarrassment, as politicians attempt to source our problems to the fact there are almost three citizens shoehorned into every square kilometre of Australia, here are some talking-points:

* Frustrated you can’t get tickets to the big game? Once we block the reffos, convince people to stop having sex, and move across to a sustainable Australia, everybody will be able to attend the AFL or NRL grand final.

* Sick of waiting around in the morning while other family members use the bathroom? Me too, and I blame the fact there are too many people in Australia.

* Can’t get the job you want? Can’t win the girl you desire? Can’t own the car of your dreams? Have you noticed the common link? That’s right: there’s always some other bastard who already has these things. Too many Australians!

As best as I can tell, the only political party with a pro-immigration policy platform is the libertarian Liberal Democratic Party (you can read their policy here).

The following observation by Greg Mankiw could have been written in response to Ken Henry’s recent lament about the role of economists in public policy:

economists are social scientists, not politicians. And whether they work for the government or have the luxury of merely observing the scene from an ivory tower, the integrity of the profession and the importance of the work involved demand that they be subjected to critical judgment; they must be compelled always to submit their assumptions, data, models, and conclusions to careful scrutiny. The foremost job of economists is not to make the lives of politicians easier, but to think through problems, to examine all the available information about the problems’ causes and potential treatments, and to propose the solutions most likely to work.

This is a simple point, but one that is easy to forget. As Milton Friedman once put it: “The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is ‘politically feasible’ and then to recommend it.”

In a time of economic uncertainty and political turmoil, we economists — both in and out of government — could hardly do better than to follow Friedman’s sage advice.

It keeps him out of the country, it costs us next to nothing, he speaks perfectly impenetrable international bureaucratese and based on experience at Copenhagen he will put the cause of an international agreement on climate change back years if not decades. What’s not to like about Kevin Rudd as UN adviser on climate change?

John Birmingham gets the relationship between population growth and infrastructure:

Our built environment, our urban infrastructure has always lagged at least a decade behind what was required to house and support our population. We don’t build empty cities and wait for them to fill up. It’s more efficient, and less wasteful, to cram our new arrivals into the streets and houses and apartment blocks and schools and offices and factories we already have. Only then do we begin to build the extra capacity we need to service the growth.

Imagine if you will the RBA publishing a Research Discussion Paper that reached the following conclusions:

despite a relatively stable total fiscal impulse the effectiveness of spending shocks in stimulating economic activity has decreased over time. Short-run spending multipliers increased until the late 1980s when they reached values above unity, but they started to decline afterwards to values closer to 0.5 in the current decade. Long-term multipliers show a more than two-fold decline since the 1980s. These results suggest that other components of aggregate demand are increasingly being crowded out by spending based fiscal expansions. In particular, the response of private consumption to government spending shocks has become substantially weaker over time.

rising government debt is the main reason for declining spending multipliers at longer horizons, and thus increasingly negative long-run consequences of fiscal expansions. We interpret this finding as an indication that further accumulating debt after a spending shock leads to rising concerns on the sustainability of public finances, such that agents may expect a larger fiscal consolidation in the future which depresses private demand and output. We also find that a stronger response of the short-term nominal interest rate goes along with declining spending multipliers. This result is consistent with an increasingly offsetting reaction of monetary policy to the expansionary fiscal shock.

The extract is from a European Central Bank Working Paper and the conclusions reached are in relation to the euro area. Don’t hold your breath waiting for the RBA to publish a similar study of activist fiscal policy in Australia.

ALAN KOHLER: In fact you call it “libertarian paternalism” in your report. And I must say reading your report it seems to leans toward the paternalism rather than the libertarian.

JEREMY COOPER: Possibly but go back to the original idea it’s very paternalistic. Compulsory superannuation, which really only exists in a very few countries, is very paternalistic.

It’s saying, well unless we force the population to put money away for retirement they’re not going to do it, so we’re going to work out what we think what they’re best interest is and we’re going to force them to hold back wages which would otherwise would be spent on school shoes and petrol and all those important things.

That money is held back by the government, that’s very paternalistic. So to criticise these ideas because they’re paternalistic forgets what the system, what super actually is.

Perhaps the most honest assessment of the motivation behind compulsory super I have heard to date.

China’s contribution to global resource demand is well known, but its important contribution to augmenting global resource supply is underappreciated, frequently misunderstood, and often feared. Concerns over Chinese intentions in relation to commodity production and pricing were readily apparent in the Australian debate over Chinalco’s failed bid for Rio Tinto last year, but have also been raised in relation to other acquisitions.

These issues are examined in a new study, China’s Strategy to Secure Natural Resources: Risks, Dangers, and Opportunities, published by the Peterson Institute and authored by Theodore Moran, a member of the US Director of National Intelligence Advisory Panel on International Business Practices. Rather than just raising abstract concerns, Moran examined the actual record of China’s 16 largest foreign resource procurement arrangements between 1996 and 2006, including several in Australia.

Moran concludes that ‘looking at the effect of Chinese procurement efforts on the structure of the global supplier base for energy and minerals, the empirical record to date suggests a predominant thrust … toward diversification of output and enhanced competition among producers.’ It is for these reasons that competition regulators in Australia, Germany and the United States did not raise significant objections to Chinalco’s proposed increased stake in Rio.

Moran argues that Chinese involvement in the development of rare earth elements (REEs) ‘may constitute a significant exception’ and warrants greater ‘circumspection.’ But even here, concerns have been exaggerated. Despite the name, these elements are not particularly rare. The least abundant REEs are still 200 times more abundant than gold. The idea that REEs are scarce is belied by the fact that low prices have often been the main obstacle to the development of more diversified sources of supply.

Australians tend to see China through the prism of growing export demand and higher commodity prices, although there are also significant benefits to Australia’s terms of trade through the import side of the trade relationship. China’s real long-term significance to the global resource sector may be as a source of the much-needed investment that will increasingly alleviate global supply constraints, putting downward pressure on global commodity prices by boosting output, employment and exports in countries like Australia.

The 11.1% surge in consumer confidence between June and July shows a clear partisan divide, with confidence on the part of Coalition voters up 19.8% compared to a more modest 3.9% for ALP voters, but this is still a big surge in confidence among Labor voters for a series that has an historical standard deviation of 5.1%. The ~75-80% probability of a Labor victory being priced in betting and prediction markets suggests that Rudd’s demise has significantly improved Labor’s election prospects.

Meanwhile, Frank Brennan thinks we should give Rudd credit just for showing up to work:

Having resigned as prime minister, Rudd had the good grace to turn up to question time, taking his place on the backbench.

Consumer confidence surged 11.1% in July, the ‘strongest monthly increase in the Index from a base above the 100 level since records began in the mid–1970s’ according to Westpac. The press release is far too polite to point to the most obvious reason for the surge in confidence, but we can all read between the lines:

Interest rates do not appear to have been the most significant driver of the July result. The confidence of those folks with a mortgage actually rose a little less than tenants or others. As we noted last month the 5.7% fall in the Index in June seemed to be partly driven by concerns about the Budget and tax policy.

Consumer sentiment doesn’t have much independent explanatory power for economic activity once you control for other variables, suggesting that causality runs from activity to sentiment and not the other way around. But that’s just the average effect observable to the econometrician. It does not preclude one off exogenous shifts in sentiment having a significant economic impact. Assuming the new Prime Minister can sustain the boost in confidence, dumping Kevin Rudd may prove to be something close to an economic free lunch. I have not yet seen the break-down by voting intention, but my guess is that it argues against the view that dumping Rudd was a negative from the standpoint of Labor voters.

Arthur Sinodinos notes that Kevin Rudd could destabilise a future Gillard cabinet, arguing against his inclusion in a future government.

I have an op-ed in today’s Australian arguing that improved fiscal responsibility legislation is a better approach to managing the fiscal consequences of terms of trade cycles than sovereign wealth funds such as the existing Future Fund:

a sovereign wealth fund provides no guarantee current revenue will be spent more wisely in the future than it is today.

If governments are unwilling to commit to binding fiscal responsibility legislation that improves on the existing Charter of Budget Honesty, there is no reason to believe greater use of a sovereign wealth fund will lead to better long-term fiscal management.

Part of the op-ed that hit the cutting room floor noted that Australia is not like Norway, Timor Leste or Nauru, dependent on a single export commodity. Australia’s resource endowment and overall economy is much more diversified, making Australia less vulnerable to some of the macroeconomic and other problems associated with dependence on a single commodity export.

Consistency is one of the touchstones used to evaluate not only arguments but also the people that put forward the arguments. In assessing the person advocating an argument, it is natural to look for coherence over time in their arguments and, secondly, whether the person offers a convincing explanation for a change of view. We apply this framework to evaluate some of Paul Krugman’s macroeconomic analysis…

The contrast between his assessment of 2002/2003 and 2008/2009 is so large and the justification for the changed view so ephemeral that we feel his policy recommendations no longer have the required consistency and coherency.

The decision to save counts as deferred consumption, which has its own multiplier effect. Here it is best to drop the term and just substitute for multiplier effect the traditional concern with gains from trade through voluntary transactions, which typically have positive external effects by creating additional opportunities for others. As one person saves the other invests in long term projects with borrowed capital. The key point is that stable expectations require enforceable contracts and steady and predictable price levels. So long as each person makes informed trades, each of these contracts over time should be a positive sum. Reduce the transaction costs in good Coasean style by supporting stable property relationships and the temporal consumption issue will take care of itself in the same way that all such allocations take care of themselves.

The Prime Minister’s special taskforce on energy efficiency has concluded its report to hand to Ms Gillard, calling on her to adopt a national energy efficiency target. The target will lead to bans on many energy-sapping appliances being sold in Australia.

The Hybrid Camry, which began rolling off its Melbourne assembly lines six months ago, was expected to attract 10,000 buyers this year, but fewer than 3000 had been registered at the halfway mark, this week’s figures reveal.

A string of record months for vehicle sales and an aggressive marketing campaign by Toyota failed to stimulate demand for the Hybrid Camry, hailed as a new era in Australian manufacturing by Kevin Rudd when he launched it in December, just before he flew to Copenhagen for the ill-fated climate change summit, and the project was granted $35 million from the green car scheme.

We reported on the five-year Tierney-Simmons oil price wager back in 2005. Mark Perry notes that Tierney has all but won his bet against peak oil crankery:

In August of 2005, Houston banking executive Matthew Simmons and New York Times columnist John Tierney each put up $5,000 and made a bet about the price of oil in 2010.

The wager was based on the price of oil in 2010, specifically on the average daily price for the entire year, adjusted for inflation into 2005 dollars. If the inflation-adjusted oil price this year is $200 or more per barrel, Mr. Simmons wins $10,000 plus interest, and if the average price this year is less than $200, Tierney wins the bet.

The bet was made public in Tierney’s New York Times column on August 23, 2005 called “The $10,000.00 Question.”

Julian Simon is still winning from beyond the grave:

Julian Simon’s widow put up $2,500 towards Tierney’s $5,000 obligation, to honor the tradition of her husband’s famous wager with Paul Ehrlich.

I attended the Sydney launch for John Birmingham’s new novel, After America, part of a planned trilogy that follows from Without Warning. In the first instalment, the bulk of the continental US is destroyed on the eve of the Iraq war and the novel speculates about the likely implications for the rest world. Birmingham said that the idea for the first book came from an anti-American rant by a fellow student radical when he was at university. The book is a cautionary tale about what happens when the rest of the world finally gets what it wished for.

Birmingham’s talk did clear up one mystery for me: why he kills off some of his more likeable characters. He randomly pulls names out of a hat to determine who will die. As Birmingham notes, it adds an extra element of unpredictability to the action.

I’m a fan of the speculative fiction genre. As the economist Simon Kuznets once observed, science fiction is a much better guide to the future than the writing of most economists, who consistently sell the future short. Birmingham’s ‘axis of time’ trilogy, first published in 2004, features the ‘flexipad’, effectively anticipating the iPad of 2010. We didn’t need to wait until 2021 for that one.

KEEP checking the Treasury website. Any day now a speech by Ken Henry, meant to be private, will appear. In it, he will distance himself from the Gillard government, condemn it for its profligacy, for its weakness, for ignoring Treasury advice and for poor policy formulation in the run-up to an election.

It should say something like this: “[Treasury] will be under pressure to respond to the growing number of policy proposals leading up to the calling of an election, and once the election is called.

“At this time, there is a greater than usual risk of the development of policy proposals that are, frankly, bad.”

And: “There is a temptation to think that all problems can be solved by government spending.”

If previous practice is observed, that is what would happen, followed swiftly by the appearance of those supposedly private observations to staff, on the front pages of newspapers.

Then again, maybe not.

But that is what happened in 2007. The quotes above are taken from a speech by Henry in March that year, a few weeks after prime minister John Howard released the $10 billion water security plan to save the Murray Darling Basin.

A key figure in the negotiating team of one of the major mining houses puts it more bluntly: “Clearly Ken Henry was on a mission from God. The fact that Treasury had got religion was not the biggest surprise. What we were especially amazed at was the level of sheer naivete and incompetence. The grasp of fundamental economics—more specifically commercial reality—was barely past what you learn in year 12 at high school.”…

In the end the miners were not provided with Treasury’s modelling until last Wednesday. These were the numbers that, according one insider, had come from “planet Mars”.

“They had made it up and had no idea how to back it up. It was like sitting university professors down to lecture primary school students,” one of the miners’ advisers claimed yesterday.

Staff writers at The Australian have compiled a comprehensive psychopathology of former Prime Minister Kevin Rudd, showing him to be every bit as bizarre as former Labor leader Mark Latham. I was particularly struck by this passage:

In April 2008, at the height of his power and popularity, he gave an address to the Sydney Institute annual dinner that completely misjudged his audience.

Many of those there groaned inwardly as Rudd failed to read the occasion or recognise the sheer power in the room.

Rudd did exactly the same thing at the closing dinner of a private CIS function I attended in July 2008, except people groaned outwardly on that occasion. The audience included a large number of the country’s most senior business people. Half way through the speech, the people at my table were looking at each other with a WTF? expression on their face. I could not tell whether the speech was a calculated insult, or whether Rudd sincerely thought the speech was appropriate to the occasion. It was an extraordinary performance in any event.

In 2005, compared with 1955, the average human being on Planet Earth earned nearly three times as much money (corrected for inflation), ate one-third more calories of food, buried one-third as many of her children and could expect to live one-third longer. All this during a half-century when the world population has more than doubled, so that far from being rationed by population pressure, the goods and services available to the people of the world have expanded. It is, by any standard, an astonishing human achievement.

Der Spiegel profiles the four German professors valiantly trying to bring down the euro and the bailout of Greece:

The court in Karlsruhe dismissed their request for a court injunction against the Greek bailout. But now that the Constitutional Court is reviewing at length whether to consider their complaint, Schachtschneider believes that it stands a chance of succeeding after all. In any event, he intends to publish the 60-page brief as a legal reference book, thereby going down in the history of the anti-euro movement once again. Hankel is against the idea. He would prefer that the group publish a book that is more accessible to the general public, something along the lines of their 1998 book “Die Euro- Klage. Warum die Währungsunion scheitern muss” (“The Euro Suit: Why the Monetary Union Must Fail”) or the 2001 work “Die Euro-Illusion” (“The Euro Illusion”).

We have large challenges ahead, not least of which is an upcoming G20 summit in Toronto, at which I am currently scheduled to lead an Australian delegation. This G20 summit will deal with a whole range of fundamental reforms to the financial system, which goes to the interests of the Australian banks and the cost of credit in this country.

These are important national interests to pursue, it is one reason why I’ve decided, apart from others, that its important to resolve this matter of the leadership as a matter of urgency.

Former Treasurer Peter Costello’s farewell speech to the House, after he decided being opposition leader was too much like hard work:

I do not need to say that, from our perspective, a seat at the table which represents 90 per cent of global GDP is a very, very important diplomatic position for us and for our country.

Former Treasurer Peter Costello, explaining why the G20 is very, very important:

BARRIE CASSIDY: All right. Let’s move on to the G20 now and its involvement next weekend under your chairmanship. 90 per cent of the world’s economies under one roof, but could you identify one key result you would like to see emerge from the conference?

PETER COSTELLO: First of all, let’s say, Barrie, this is the biggest financial conference Australia has ever hosted and ever will. This organisation, where Australia not only has a seat at the table, of the 20 most important economies of the world, but is chairing it, that brings together the developed world and the developing world, is important in itself. That’s significant in itself.

An ineffectual international organisation yesterday issued a stark warning about a situation it has absolutely no power to change, the latest in a series of self-serving interventions by toothless intergovernmental bodies.

“We are seriously concerned about this most serious outbreak of seriousness,” said the head of the institution, either a former minister from a developing country or a mid-level European or American bureaucrat. “This is a wake-up call to the world. They must take on board the vital message that my organisation exists.”

The director of the body, based in one of New York, Washington or an agreeable Western European city, was speaking at its annual conference, at which ministers from around the world gather to wring their hands impotently about the most fashionable issue of the day. The organisation has sought to justify its almost completely fruitless existence by joining its many fellow talking-shops in highlighting whatever crisis has recently gained most coverage in the global media.

“Governments around the world must come together to combat whatever this year’s worrying situation has turned out to be,” the director said. “It is not yet time to panic, but if it goes on much further without my institution gaining some credit for sounding off on the issue, we will be justified in labelling it a crisis.”

The organisation, whose existence the White House barely acknowledges and to which hardly any member government intends to give more money or extra powers, has long been fighting a war of attrition against its own irrelevance. By making a big deal out of the fact that the world’s most salient topical issue will be placed on its agenda and then issuing a largely derivative annual report on the subject, it hopes to convey the entirely erroneous impression that it has any influence whatsoever on the situation.

The intervention follows a resounding call to action in the communiqué of the Group of [number goes here] countries at their recent summit in a remote place no-one had previously heard of. The G[number goes here] meeting was preceded by the familiar interminable and inconclusive discussions about whether the G[number goes here] was sufficiently representative of the international community, or whether it should be expanded into a G[number plus 1, 2 or higher goes here] including China, India or any other scary emerging market country that attendees cared to name.

The story was given further padding by a study from an ambulance-chasing Washington think-tank, which warned that it would continue to convene media conference calls until its quixotic and politically suicidal plan to ameliorate whatever crisis was gathering had been given respectful though substantially undeserved attention.

Business Insider rounds-up the usual suspects. I agree with at least one of them: Tim Congdon. As I noted in this op-ed earlier in the year, bond markets were overstating inflation risks at the expense of the more likely scenario of continued ‘stimulus’-induced stagnation.